How to create a cage for baking?
From polycount wiki:

Most normal map baking tools allow you to use a distance-based raycast. A ray is sent outwards along each vertex normal, then at the distance you set a ray is cast back inwards. Where ever that ray intersects the high poly mesh, it will sample the normals from it.
Unfortunately with a distance-based raycast, split vertex normals will cause the bake to miss parts of the high-res mesh, causing errors and seams.

Some software allows you to use cage mesh option instead, which basically inflates a copy of the low-poly mesh, then raycasts inwards from each vertex. This ballooned-out mesh is the cage.

So the Cage mesh is a low-poly mesh defining how far will be the rays cast. Its good for fine control, but usually you can get away with just properly set Ray Distance in the Baking panel and having smooth shading.